Sikorsky sees vibrant military helicopter market

STRATFORD, Connecticut (Reuters) - The U.S. defense budget is under intense pressure as automatic spending cuts loom, but Sikorsky Aircraft says the longer-term outlook for military helicopters remains bright given several new programs getting started in the United States and strong overseas demand.

Samir Mehta, president of Sikorsky military systems, said in an interview that he is confident that two of the biggest opportunities for his company - a U.S. Air Force competition for new search and rescue helicopters and a U.S. Navy competition for new presidential helicopters - will survive, even if the Pentagon is forced to make additional budget cuts.

Sikorsky, Lockheed Martin Corp , Boeing Co and other weapons makers are anxiously waiting to see if Congress will avert an additional $500 billion in defense spending cuts that are due to start taking effect on January 2. Those slashes would occur on top of $487 billion in cuts already on the books.

Both cuts would phase in over 10 years. Many executives say they expect some additional cuts to military spending, even if a deal is reached to avoid the automatic budgets reductions under "sequestration."

Stratford, Connecticut-based Sikorsky, a unit of United Technologies Corp , is the maker of the UH-60 Black Hawk and other helicopters.

Most defense companies expect revenue to come under pressure in coming years after more than a decade of growth in military spending. However, they do not forecast sudden declines in January, since most weapons deals stretch over many years.

The 87-year-old Sikorsky is also investing heavily to develop its new S-97 Raider helicopter in hopes that the U.S. Army will decide later this year to buy a new helicopter to replace its aging OH-58 Kiowa Warriors, rather than upgrade the existing fleet. The Kiowa Warriors are made by Bell Helicopter, a unit of Textron Inc .

"It's very easy to be focused on the short term in the next two to three years, and say, 'Boy, the meteor's coming at us and we're headed for really tough times,' but if you look at this industry over the next 20-30 years, it's going to be vibrant," Mehta told Reuters in an interview at the company's sprawling headquarters on Tuesday.

FUTURE VERTICAL LIFT

Mehta said Sikorsky and other helicopter makers were also gearing up for what U.S. Army officials are calling "Future Vertical Lift," a massive program that would replace many of the Black Hawks and Boeing Apache helicopters now in service.

"I know there's short-term pressure but ... the life cycle of an aviation development program will outlive whatever short-term crisis we happen to be in at the time," he said.

Mehta, a trained lawyer who began his career at United Technologies' Otis Elevator unit, said the lingering uncertainty about future budgets was frustrating, but his company was focused on continuing to deliver those helicopters already on order to the U.S. military on time and on budget.

"There's no shield against sequestration, but hopefully when they go through the process - if they go through the process ... they'll look at performance as a key determining factor of whether or not you'll be specifically targeted," he said.

Pentagon officials have said that weapons programs that are over budget or behind schedule will be increasingly vulnerable to cuts as budget pressures mount.

Mehta said Pentagon officials also seemed to appreciate Sikorsky's investment of its own funds to develop its new X2 helicopter, which is considered the fastest helicopter ever built, and a larger military prototype, the S-97.

Sikorsky, which together with Boeing dominates the U.S. military helicopter market, spent $50 million to develop the X2 - which uses two rotors and a rear propeller to overcome the aerodynamic limitations of conventional helicopters - and "healthy multiples" of that sum on the S-97, Mehta said, although he declined to give specific numbers.

He said the company would continue work on the S-97, which is expected to have its first flight in the fourth quarter of 2014, even if U.S. Army officials decide not to launch a competition to replace the OH-58 Kiowa Warrior armed scout.

In the longer term, the S-97 could be a contender for the Army's next-generation helicopter program, or future vertical lift, which some see as the "Joint Strike Fighter" of military helicopters, Mehta said, referring to the massive and lucrative next-generation strike aircraft weapon systems for the United States and its allies.

The speed, maneuverability and agility of the new helicopter will provide "game-changing" capabilities to the U.S. military, Kevin Bredenbeck, chief test pilot for Sikorsky, told Reuters in a separate interview.

PRAGMATIC APPROACH

Steve Engebretson, who heads Sikorsky's armed aerial scout effort, said the company was confident that it could price the new helicopters at a cost in the "mid-teens" of millions - just slightly more than the Army would likely spend to upgrade the OH-58 helicopters it is using now. But he said the new aircraft would give the Army far more capabilities than it has now.

Other helicopter makers, including Europe's EADS , which has a new helicopter called the X3, and AgustaWestland, a unit of Italy's Finmeccanica SpA , have also urged the Army to launch a new development program.

Army officials are expected to reach a decision about the issue in coming weeks, although the decision will still need approval by top Pentagon acquisition officials.

Mehta said he did not expect the Air Force and Navy to back off their new helicopter competitions, both of which come after failed earlier programs, given the increased age of the current fleets, which is driving up maintenance costs, and the Pentagon's increased focus on affordable programs.

He said Pentagon officials also recognized that they could not continually ask industry to invest time and money to prepare bids for competitions only to see programs get cancelled.

"They've taken a really pragmatic, cost-effective approach," he said. "That provides us with a little more confidence that they won't back away from these programs once they've started."

Sikorsky also sees strong growth in international markets in coming years, especially in Asia, the Middle East and Africa, Mehta said, noting that a majority of the helicopters in use around the world were over 20 years old.

"There's a practical aspect to this, which is that people need to recapitalize and replace their fleets, whether it's the (U.S. Department of Defense) or even international militaries."